Essays On The Role Of Firm Behavior In International Trade

Author : Chi-Hung Liao
Publisher :
ISBN 13 : 9781321211993
Total Pages : pages
Book Rating : 4.2/5 (119 download)

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Download or read book Essays on Product Quality in International Trade written by Chi-Hung Liao and published by . This book was released on 2014 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: Product quality plays an important role in determining international trade flows. Its level is related to product unit value, characteristics of importing countries, and many other key variables in trade. In this dissertation, we study product quality and its role in various trade topics. In the first chapter, we study its role in price markup and how it is related to the importing countries' income. In the second chapter, we study multi-product firm's decision on exporting the top and the bottom qualities and the range of quality ladder facing different destination markets. In the last chapter, we study how a firm's offshoring decision is related to the quality of final product, the probabilities of making mistakes, the wage difference, and the size of the economy. We will describe each chapter in detail in the following paragraphs. We believe this dissertation complements current literature on product quality and tradein the areas of price markeup, multi-product firm behavior, and offshoring decision. In the first chapter, we begin by documenting the price discrimination practice based on destinations' per-capita income levels from the automobile industry. It is found that low-quality model manufacturers practice price discrimination while high-quality model manufacturers set price more uniformly across destinations. A highly tractable model was developed to capture these different practices of pricing strategies by including the distribution cost in the firm's decision. Each firm in the model simultaneously chooses quality and price to maximize its profits. The model predicts that highly productive firms not only produce higher quality products, but also price their products more uniformly across destinations. An extension of the model that features consumer income inequality predicts that products are sold at higher prices in countries with high income inequality. This result reconciles observations of high prices found in some developing countries such as China. Empirical results support the model's two key predictions: firms with higher productivity price their products more uniformly; and countries' income inequalities affect price positively.The second chapter is motivated by the stylized fact that not all vertically differentiated car models are sold sold in each country. Furthermore, the number of car models sold in each country appear to be systematically affected by destination market's conditions. To study this stylized fact of multi-product firm's decision on quality products, we use a model where firms simultaneously determine optimal prices and the range of quality products. It is found that the top and bottom qualities and the length of the quality ladder are affected systematically by various firm's and market's conditions. The empirical results using European car data from 1993-2011 supports the key predictions in the model.In the last chapter, we are interested in studying firm's offshoring decision and how it is related to product quality. In recent years, the highly intensified and diversified global offshoring activities have been accompanied by some onshoring activities led by large U.S. manufacturing companies. To address this stylized fact, we started with a value-chain offshoring model with product quality specification. Besides the wage difference between countries, the model assumes that each country has a probability of making mistakes. It is found that the range of tasks processed in offshoring destination is related to the probabilities of making mistakes, the wages, and the size of the economies. Increasing the quality of final product, however, does not change the range of products being offshored which implies an onshoring activity. Following the theoretical model, we use the trade data in China from 1998-2013 in the empirical model and confirm the key predictions in the theoretical model. This chapter contributes to current offshoring literature by addressing the product quality specification, the onshoring activities, and identifying the effect of making fewer mistakes on the range of products offshored.